There are no precedents for a tragic event of this kind, so economists have been left peering into a broken crystal ball.

This uncertainty was reflected in the markets. The dollar fluctuated wildly. Political developments dragged the dollar down, and rumours of international financial co-operation measures pulled it back up. Above all, most currency market participants were waiting on the verdict of the stock markets.

'Most players in the foreign exchange market were still sidelined some three days after the attack,' says Divyang Shah, of financial analysts Ideaglobal.

'Many banks have decided not to trade - out of respect, and also settlement problems, which some are experiencing. Trades have been seen only on a need-only basis.'

The dollar fell nearly 3 per cent against major currencies in the immediate aftermath of the World Trade Centre attack. Central bank confidence-building measures had calmed the market on Wednesday and Thursday.

But late on Friday the dollar went into a tailspin, taking sterling with it, as the prospect of war bred pessimism. The dollar has often been a haven in times of geopolitical strife. Now currency markets seem unsure if that was relevant with the US at the heart of the attack.

The Swiss franc and gold were the beneficiaries of this aversion to the risks ahead.

'We expect the euro to reach 0.95 against the dollar in the next three month,' says Hans Redeker, at BNP Paribas. 'The medium-term outlook for the dollar will depend on whether the US authorities succeed in stabilising consumer and business expectations.'

Last Tuesday's tragedy will affect the currency markets in three ways: the effect on economic fundamentals, on sentiment, and on the microstructure of the forex markets. These will vary depending on how the military situation develops.

For example, the extra public spending associated with a war effort may provide a timely boost to the US economy. But the huge provision of liquidity by the Federal Reserve could weigh against the dollar. The global appetite for risk is likely to fall, says Lehman Brothers. The capital flows that financed the US current account deficit were already beginning to dry up. If Japanese and European investors repatriate investment flows, the dollar should come under pressure.

Then there is the effect of the blow to private sector confidence, the 'Achilles' heel' of the US economy, according to John Llewellyn, Lehman's chief economist. Consumer confidence was ebbing even before Tuesday's attack. A University of Michigan survey for September showed a sharp drop in confidence from 91.5 to 83.6.

'These cross-currents appear to have left the foreign exchange market in a state of tenuous equilibrium. Do not be surprised if the dollar rebounds by 1-2 per cent by the end of next week, but those negative fundamentals should dominate before the end of the month,' notes Lehman.

A sharp depreciation in the external value of the dollar is seen as destabilising to the world economy. So economists expect a co-ordinated monetary easing from central banks around the world, and a possible joint effort to intervene in currency markets, led by the Fed.

Indeed co-ordination was, and still is, required to ensure the integrity of the global financial system.

Though the European Central Bank did not cut base rates last Thursday, it has been playing its part in injecting a huge amount of liquidity into financial markets, in conjunction with other central banks. Nearly £190 billion was injected into global markets last week.

Additionally, the ECB and Fed joined forces for an unprecedented $50bn currency swap arrangement. This provided dollar liquidity in European markets.

Market microstructure considerations suggest a mixed picture for the dollar. Volumes were thin last week due to logistical difficulties.

But demand for dollars will rise as the price of oil and gold goes up. Banks have been restricting the scope for hedge funds to take advantage of currency market volatility.

The Group of Seven and the International Monetary Fund have also tried to ensure that pessimism does not go too far, pointing out that the attack, however costly, has done nothing to shake the underlying robustness of the world's largest economy.

Indeed, Stephen Jen, a Morgan Stanley economist, goes as far as to say that the more extreme the retaliation from the White House, the stronger the dollar will be.